Despite a weak January, we cannot rule out the UK’s anticipated growth pickup through the 1st quarter. The recent energy price spikes have become a major challenge. This situation is potentially leading to a longer period of stagnation through ’26. The job market’s likely to shrink with real wages falling back with increased inflation. The bar for a Bank of England (BoE) rate hike seems imminent.
Weak January
January marked a lacklustre beginning for the UK economy in 2026. This was revealed in the latest monthly GDP figures. January’s output remained unchanged relative to December ’25. Besides hospitality, it was held back by a sharp decline in administrative / support services, which experienced a significant drop in demand due to ongoing economic uncertainties and changes in workforce dynamics.
When compared to last year, a pattern of fluctuation in these figures has been observed. Realistically, the UK economy is likely to be presently recording modest growth. If reviewing the 3-month average of monthly GDP, the narrative seems a little better than the previous one. In the past, UK growth figures have shown a concerning pattern of being stronger in the first quarter (1Q) compared to the other quarters throughout the year.
It is a trend that began in the UK economy 4 years back in ’22. Suspicion links this trend to a period of higher inflation. Price hikes tend to target the first half of the year. This may not be fully accounted for in the seasonal adjustment and/or deflation process. In other words, it cannot be ruled out that there will be a strong bounce back during February or March. It is an exact repetition of what occurred last year after a similar weak January ’25.
The bar for a rate hike by the BoE is high
All of this, of course, becomes moot. This is due to the current uncertainty surrounding the increase in energy costs. The longer the enhanced gas & oil prices stay at enhanced price levels, the larger the growth impact is likely to be. If the present level of prices remains, it would probably reach a peak for headline inflation in late summer around 3.5 percent. The peak may coincide with private-sector growth which is biased towards 3%. The outcome may also mean that real incomes are likely to fall.
